It took nearly three years and two governments, but the Compensation Scheme of Last Resort (CSLR) is ready to launch on April 2nd – and, most pertinent to this discussion, industry funding for the scheme will commence on July 1st.
Ahead of its launch, the CSLR has released estimates of the amounts leviable to the different industry sectors under its remit. Of the total $24 million payable by industry for the 12 months from July 2nd, roughly 76% – or $18.6 million – will be billed to the advice sector. This works out to around $1,200 per adviser plus a minimum $100 per leviable entity (licensee).
Perhaps it goes without saying at this stage, but the CSLR costs are payable on top of the existing ASIC levy, which reached $3,217 per adviser for 2022-23 before being marginally reduced to $2,818 in November last year. Given that the CSLR's funding model inherits its industry sub-sector definitions from the ASIC Supervisory Cost Recovery Levy Act 2017, you can reasonably expect future costs for the scheme to rise and fall in proportion to the ASIC levy each year.
The black swan
As to what's driving the advice sector's projected $18.6 million CSLR bill, the report produced by principal actuary Finity Consulting provides a pretty clear answer: Dixon Advisory.
According to Finity's report, both ASIC's successful 2022 proceedings against Dixon and the $16 million settlement in the class action against E&P Financial Group (of which Dixon is a wholly-owned subsidiary) in December 2023 indicate that "most, if not all, of the post-CSLR complainants in relation to [Dixon] will be free to have their complaint determined and, if a non-zero determination is made, to then lodge a claim with the CSLR."
The report added: "The decision of the Federal Court in ASIC's action against [Dixon] strongly supports the assumption that these complainants will largely be successful."
At present, complaints relating to Dixon Advisory represent "more than 80% of the currently open, in-scope, post-CSLR complaints," per the report. And Dixon-related claims "dominate" the $18.6 million levy estimate for the advice sector.
It's worth noting, though, that the current estimate represents something of a middle ground in Finity's calculations; the report suggests that "outgoing scenarios" for the advice sector range from $11.5 million to $39.4 million. Plausible reasons why the estimate might increase include:
- All successful Dixon complainants go on to lodge successful CSLR complaints
- The average size of Dixon claims is larger than anticipated
- An "additional surge of complaints" against Dixon occurs
- AFCA manages to process complaints "faster than anticipated"
In a statement, FAAA CEO Sarah Abood said that the Dixon Advisory "black swan" event, along with the shortening of the period where the CSLR would be funded by Government, "appear to have had a highly retrospective and negative effect."
She added: "It is extremely concerning that because of these issues, the high-quality and compliant financial advisers of today are being asked to fund compensation for the clients of Dixons, a firm which has been in administration now since January 2022 – over two years ago and long predating the establishment of the scheme."
Abood argued that, because Dixon remained an Australian Financial Complaints Authority (AFCA) member despite entering voluntary administration in January 2022, Dixon-related complaints should be reclassified as legacy complaints and funded by the Government.
Charging advisers for these historical complaints, she said, "flies in the face of the intent when setting up the scheme, as it will now become almost wholly retrospective in the way it applies to financial advice, well into the second and later years of operation."
Levy on levies
Perhaps unsurprisingly, Abood also observed that the CSLR levy arriving not long after "an historically high ASIC levy" reflects poorly on the Government's stated aim of increasing the accessibility and affordability of advice.
"If advisers are driven out of business by rising costs through being made to pay for the poor behaviour of those who left the sector years ago," she said, "there won’t be a financial advice sector left to have confidence in."
If you'll recall, Michelle Levy also discussed the industry funding model's impact on advice affordability in her final report for the Quality of Advice Review. While ASIC levies were outside of the QAR's terms of reference, Levy said she was "not unsympathetic to the concerns raised" about these costs, adding: "They are high."
Following the review of the ASIC industry funding model last year, there may be some potential for public consultation on changes to aspects of the levy calculations (such as sub-sector definitions). But the CSLR levy has a more fundamental problem, and it goes beyond whatever future costs may be incurred due to Dixon-related complaints: the scope of the scheme itself.
The scope problem
The CSLR was designed to function as the last port of call for consumers seeking compensation in circumstances where an AFCA determination remains unpaid. However, the scheme has a narrower remit than AFCA – complaints regarding managed investment schemes, for example, can be lodged with AFCA but not the CSLR.
The reduced scope has long provoked concern within the advice industry (including the FAAA's predecessor associations) that advisers could end up on the hook for product failures beyond their control.
This is because the current design of the scheme effectively funnels de facto responsibility for any product failure that arises as a result of factors other than market conditions (fraud or other misconduct, for example) down to the adviser/distributor who recommended the product. And with that responsibility comes the lion's share of the CSLR's industry funding.
Justifying the CSLR's scope at the time, then-Minister for Superannuation, Financial Services and the Digital Economy Jane Hume said the scheme shouldn't become "an insurance designed to pay compensation to any consumer who has lost money in an investment."
She added that sensible investors shouldn't see their "returns clipped to underwrite people who punt their savings on emu farms or tulips or other too-good-to-be-true high-return, high-risk investments."
Who pays the piper?
Surely, though, Dixon's "dominating" presence in this first round of industry levies complicates this argument. After all, Dixon was a subsidiary of investment management firm E&P Financial Group – whose products, such as the US Masters Residential Property Fund, directly benefited from the vertically-integrated advice model implemented within the business.
Queensland Senator Susan McDonald drew attention to this exact issue late last year, asking ASIC whether it was fair that "a vertically-integrated group like E&P Financial Group, with a large investment management business, could place one of their advice subsidiaries into liquidation and then leave it for small business financial advisers to pick up the cost."
While the apportionment of blame is a matter for the courts to decide in E&P and Dixon's case, one wonders how liable (and leviable) advice practices with substantially different business models should be in the context of a consumer compensation scheme.
At this stage, it's unclear whether the Government intends to address the potential flaws in the CSLR's design. Minister for Financial Services Stephen Jones hasn't said much on the issue – only announcing in February that the Government would aim to provide "certainty to consumers" about the CSLR's scope "in due course".
It's difficult to estimate what "due course" might look like, considering we're still waiting for draft legislation covering the next tranche of QAR reforms. But if advice affordability really is a policy priority, this is an issue that might merit some expedited investigation.
Advisely Team
